Ussec v. E. Andrew Schooler

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

U.S. SECURITIES & EXCHANGE No. 16-55167

COMMISSION,

Plaintiff-Appellee, D.C. No.

3:12-cv-02164-

v. GPC-JMA

E. ANDREW SCHOOLER,

Defendant-Appellant, OPINION

and

FIRST FINANCIAL PLANNING

CORPORATION, DBA Western

Financial Planning Corporation,

Defendant.

Appeal from the United States District Court

for the Southern District of California

Gonzalo P. Curiel, District Judge, Presiding

Submitted July 13, 2018*

Pasadena, California

Filed September 26, 2018

*

The panel unanimously concludes this case is suitable for decision

without oral argument. See Fed. R. App. P. 34(a)(2).

2 USSEC V. SCHOOLER

Before: Sandra S. Ikuta and N. Randy Smith, Circuit

Judges, and Stephen M. McNamee,** District Judge.

Opinion by Judge N.R. Smith

SUMMARY***

Securities Law

The panel affirmed in part, and vacated in part, the district

court’s judgment in favor of the U.S Securities & Exchange

Commission (“SEC”) in a civil enforcement action alleging

federal securities law violations brought against Louis

Schooler and his company Western Financial Planning

Corporation.

The panel affirmed the district court’s core holding that

the general partnership interests at issue were investment

contracts and qualified as securities under federal law, and

that Louis Schooler violated federal securities law by selling

unregistered securities and defrauding his investors.

Louis Schooler died during the pendency of the appeal,

and E. Andrew Schooler (as executor of the estate) replaced

him as the named party on appeal. The panel vacated the

civil penalty ordered by the district court in light of Louis

**

The Honorable Stephen M. McNamee, Senior United States District

Judge for the District of Arizona, sitting by designation.

***

This summary constitutes no part of the opinion of the court. It has

been prepared by court staff for the convenience of the reader.

USSEC V. SCHOOLER 3

Schooler’s death. The panel also vacated and remanded the

disgorgement order for reconsideration in light of the

Supreme Court’s decision in Kokesh v. SEC, 137 S. Ct. 1635

(2017), which altered the analysis for determining the

limitations period applicable to disgorgement.

The panel affirmed the district court’s judgment in all

other aspects. The panel affirmed entry of summary

judgment for the SEC on its claims under Section 17(a) of the

Securities Act of 1933, Section 10(b) of the Securities and

Exchange Act of 1934, and Rule 10b-5 thereunder.

COUNSEL

Bryan C. Vess, Bryan C. Vess APC, San Diego, California;

Philip H. Dyson, Law Office of Philip H. Dyson, Las Mesa,

California, for Defendants-Appellants.

Stephen G. Yoder, Senior Litigation Counsel; John W. Avery,

Deputy Solicitor; Robert B. Stebbins, General Counsel;

Securities and Exchange Commission, Washington, D.C.; for

Plaintiff-Appellee.

4 USSEC V. SCHOOLER

OPINION

N.R. SMITH, Circuit Judge:

Dressing an investment contract in the trappings of a

general partnership interest does not immunize that interest

from the federal securities laws. Our standard for identifying

an “investment contract” under federal securities law has long

been “flexible rather than . . . static”; it “is capable of

adaptation to meet the countless and variable schemes

devised by those who seek the use of the money of others on

the promise of profits.” See SEC v. W.J. Howey Co., 328 U.S.

293, 298–99 (1946). The undisputed facts establish that the

general partnership interests at issue were stripped of the

hallmarks of a general partnership and marketed as passive

investments. Accordingly, we affirm the district court’s core

holding that the general partnership interests at issue qualify

as securities under federal law and that Louis Schooler

violated federal securities law by selling unregistered

securities and defrauding his investors.

Louis Schooler died during the pendency of the appeal,

but E. Andrew Schooler (as executor of his estate) replaced

him as the named party on appeal. In light of Louis

Schooler’s death and intervening Supreme Court precedent,

the Securities and Exchange Commission (SEC)

acknowledges that several components of the district court’s

judgment require vacatur or remand. Specifically, we vacate

the civil penalty ordered by the district court in light of Louis

Schooler’s death.1 We also vacate and remand the

1

To determine whether a monetary penalty abates upon a defendant’s

death we ordinarily examine whether the penalty is penal or civil in

nature. United States v. $84,740.00 Currency, 981 F.2d 1110, 1113 (9th

USSEC V. SCHOOLER 5

disgorgement order for reconsideration in light of the

Supreme Court’s decision in Kokesh v. SEC, 137 S. Ct. 1635

(2017), which alters the analysis for determining the

limitations period applicable to disgorgement. As noted

above, we affirm the district court’s judgment in all other

respects.

I.

Between 1978 and 2012 (when the SEC filed suit), Louis

Schooler individually and through his wholly owned

company, First Financial Planning Corporation d/b/a Western

Financial Planning Corporation (Western),2 engaged in the

business of identifying tracts of land to purchase and sell to

investors by means of general partnership interests. Through

these alleged general partnership interests, each

investor/partner would own a fractional interest in the parcels

to hold as a speculative investment—in the hopes that the

areas where the land was located would become developed

and the value of the land would increase. Specifically,

Schooler would identify a tract of land, purchase it in the

name of his company, and then turn around and mark up the

price (often by several multiples of the price originally paid)

Cir. 1992). If it is a ‘civil’ penalty we examine whether the penalty “is

[nonetheless] so punitive either in purpose or effect as to negate that

intention.” Id. Here the SEC affirmatively concedes that the $1.05 million

penalty “serve[s] no remedial purpose” and “should be vacated.” Given

the lack of adversary briefing on this issue, we accept the SEC’s

stipulation for purposes of this case and vacate the civil penalty, without

deciding the ultimate merits of the issue.

2

For convenience, we generally refer to the two principal defendants

before the district court (Louis Schooler and his company, Western)

collectively as “Schooler.”

6 USSEC V. SCHOOLER

to sell the land to investors. Schooler sold interests in a

general partnership to the investors that would collectively

hold the land (typically with several other general

partnerships). Schooler marketed these general partnership

interests to individuals across the United States and

ultimately sold 3,400 such interests over the lifetime of the

operation.

In 2012, the SEC brought suit asserting a host of federal

securities law violations. The SEC sought a temporary

restraining order (TRO) and the appointment of a receiver.

The district court granted a TRO and eventually converted the

order to a preliminary injunction. The parties litigated the

case through summary judgment, where the district court

granted the SEC’s summary judgment motions and denied

Schooler’s. This appeal followed.

II.

“We review the district court’s grant of summary

judgment de novo.” SEC v. CMKM Diamonds, Inc., 729 F.3d

1248, 1255 (9th Cir. 2013). In conducting this review, we

take all facts and reasonable inferences therefrom in the light

most favorable to the nonmoving party and determine

whether disputed issues of material fact preclude summary

judgment. See id.

III.

Here, we deal with federal securities laws regulating

investment contracts. 15 U.S.C. § 77b(a)(1); 15 U.S.C.

§ 78c(a)(10). The term “investment contract” has long “been

broadly construed . . . so as to afford the investing public a

full measure of protection.” See SEC v. W.J. Howey Co.,

USSEC V. SCHOOLER 7

328 U.S. 293, 298 (1946). Accordingly, “an investment

contract for purposes of the Securities Act means a contract,

transaction or scheme whereby a person invests his money in

a common enterprise and is led to expect profits solely from

the efforts of the promoter or a third party, it being

immaterial whether the shares in the enterprise are evidenced

by formal certificates or by nominal interests in the physical

assets employed in the enterprise.” Id. at 298–99.

The “touchstone” of this standard “is the presence of an

investment in a common venture premised on a reasonable

expectation of profits to be derived from the entrepreneurial

or managerial efforts of others.” United Hous. Found., Inc. v.

Forman, 421 U.S. 837, 852 (1975). The standard is “flexible

rather than . . . static” and “is capable of adaptation to meet

the countless and variable schemes devised by those who

seek the use of the money of others on the promise of

profits.” Howey, 328 U.S. at 299. Accordingly, the Supreme

Court’s use of the phrase “solely from the efforts of the

promoter or a third party” has not been literally applied to

innoculate any scheme that nominally purports to afford

investors power or responsibility to advance the common

enterprise. E.g., Forman, 421 U.S. at 853 n.18 (noting that the

“leasehold rights” sold were “purely an incidental

consideration in the transaction” where “exploratory drillings

gave investments ‘most of their value and all of their Lure’”

(quoting SEC v. C.M. Joiner Leasing Corp., 320 U.S. 344,

348–49 (1943))); SEC v. Rubera, 350 F.3d 1084, 1091–92

(9th Cir. 2003) (“We have rejected a strict interpretation of

this prong in favor of a more flexible focus on ‘whether the

efforts made by those other than the investor are the

undeniably significant ones, those essential managerial efforts

which affect the failure or success of the enterprise.’”

8 USSEC V. SCHOOLER

(quoting SEC v. Glenn W. Turner Enters., 474 F.2d 476, 482

(9th Cir. 1973))).

We must here determine whether the general partnership

interests Schooler sold qualify as investment contracts

governed by federal securities law. A traditional general

partnership implies a joint endeavor in which all partners

share in the control and management of the enterprise and

advancement of the collective profit effort. See Williamson v.

Tucker, 645 F.2d 404, 423–24 (5th Cir. 1981); see also

Hocking v. Dubois, 885 F.2d 1449, 1460–61 (9th Cir. 1989)

(en banc) (reaffirming that Williamson has been adopted in

the Ninth Circuit). Where such an arrangement was

anticipated at the outset, e.g., Williamson, 645 F.2d at 424

n.14 (noting the timing requirement that “reliance on the

manager” must be shown to be “an understanding in the

original transaction, and not some subsequent decision to

delegate partnership duties”), and is not illusory in practice,

id. at 422–24, investment in a general partnership is not a

security. See id. at 422–26.

We have adopted the three factors articulated in

Williamson v. Tucker (any one of which is sufficient) to

establish that a general partnership should be treated as a

security when:

(1) an agreement among the parties leaves so

little power in the hands of the partner or

venturer that the arrangement in fact

distributes power as would a limited

partnership; or (2) the partner or venturer is so

inexperienced and unknowledgeable in

business affairs that he is incapable of

intelligently exercising his partnership or

USSEC V. SCHOOLER 9

venture powers; or (3) the partner or venturer

is so dependent on some unique

entrepreneurial or managerial ability of the

promoter or manager that he cannot replace

the manager of the enterprise or otherwise

exercise meaningful partnership or venture

powers.

Hocking, 885 F.2d at 1460 (quoting Williamson, 645 F.2d at

424). These factors are not exhaustive. Id. (“Of course, under

different facts or legal arrangements other factors might give

rise to such a dependence on the promoter or manager that

exercise of control would be effectively precluded.”).

IV.

Applying these principles, the district court correctly

determined that the general partnership interests in this case

were investment contracts governed by federal securities law.

The district court primarily rested its decision on the fact that

investors placed their money with Schooler significantly

before their general partner interests (and associated powers)

became effective. The district court characterized this

circumstance as complying with the first Williamson factor,

but it also noted that, whether this fact fit squarely within the

first factor, it nonetheless found it to be an important other

factor establishing dependence on Schooler. The district court

also analyzed the second and third Williamson factors but

ultimately concluded that, although the SEC had submitted

significant undisputed facts to support these factors, the

record was not sufficient to establish these factors as a matter

of law.

10 USSEC V. SCHOOLER

The district court treated each of the Williamson factors

as an issue for summary judgment. However, the Williamson

factors are not in fact distinct ‘claims’ or ‘issues’ that need be

decided individually for summary judgment purposes. These

factors are simply heuristics useful in answering the ultimate

question of whether a general partnership interest should be

considered an investment contract for purposes of federal

securities laws.

Even giving Schooler the benefit of all reasonable

inferences, the collective force of the following undisputed

facts identified by the district court establish as a matter of

law that the general partnership interests in this case were

securities under federal law. First, the facts establish beyond

dispute that Louis Schooler, personally and through Western,

exercised near total control over the investments between

receipt of investor payments and execution of the partnership

agreements. Unlike a traditional general partnership, the

partnership agreements in this case were not effective upon

delivery of investor funds. Rather, the agreement stated that

it became effective upon the date identified (and intentionally

left blank) on the first page of the partnership agreement.

Because the agreements were not yet effective, investors had

no power to control their investments during this period. Yet,

it was during this precise time that nearly all meaningful

decisions were made that would determine the success or

failure of the investment. Schooler controlled how many

interests to market and sell in each partnership, diluting the

power of partners by selling a large number of interests in

each general partnership. Schooler determined the properties

to purchase and the price the partnerships would pay. He

determined how many different general partnerships to

include as co-tenants of a single property. Likewise, Schooler

determined when to close the final partnership and establish

USSEC V. SCHOOLER 11

the co-tenancy arrangements. During this critical period, 93%

of the investors’ money was expended—without any

opportunity for investor input or control.

By the time Schooler executed the partnerships by filling

in the effective date, there was little that could be done to

determine the success or failure of the investment. At the time

of execution, general partners were transferred fractional

interests in land and could do little more than hope that the

land would appreciate in value substantially more than the

ongoing maintenance expenses Schooler charged. An

investment in land for long-term holding is inherently

speculative, as expressly noted in the partner representations.

Nonetheless, decisions about what property to purchase and

how much to pay for it are among the most important

decisions in determining the success of the investment. In this

scheme, general partners had no real control over these

decisions.

Further, once the partnership agreements were executed

and co-tenancies established, Louis Schooler acknowledges

that it was “potentially unworkable” for partners to exercise

their powers to jointly manage the parcels. Louis Schooler

and his associates at Western meanwhile exercised all

practical authority in the operation of the partnership, having

defaulted authority to themselves and hand-picked signatory

partners. From the viewpoint of investors, this passive

arrangement was what many expected—having been lured in

by the promise of Schooler’s expertise in finding parcels

and directing when they should be sold. Under these

circumstances the SEC made a clear showing that investors

“were prevented from exercising their powers” as general

partners. Cf. Matek v. Murat, 862 F.2d 720, 731–32 (9th Cir.

1988) (finding a general partnership not a security where no

12 USSEC V. SCHOOLER

practical impairment to exercising partnership authority had

been shown), abrogated on other grounds by Koch v.

Hankins, 928 F.2d 1471 (9th Cir. 1991).

Andrew Schooler cites a series of cases for the

proposition that the first Williamson factor is limited to taking

the partnership documents at face value. But there is an

obvious flaw in this argument—the effective date was on the

very first page of the partnership agreement and it

unambiguously articulated that the agreement (including all

of the shared authority and control) did not become effective

until the date indicated (and originally left blank). Nothing in

the California code overrides the parties’ express agreement

that the partnership not begin until the date identified on the

face of the agreement. See Cal. Corp. Code §§ 16101(9),

16202(a) (defining a partnership as an “association of two or

more persons to carry on as coowners a business for profit”).

Even if a partnership arose in the interim, there was no

mechanism in place for partners to exercise any control over

the arrangement during this critical time period. Accordingly,

the district court did not err in awarding summary judgment

to the SEC and concluding that the general partnership

interests were securities.

V.

We likewise affirm the district court’s determination that

Schooler sold unregistered securities in violation of federal

law. Schooler essentially conceded to the district court that

his sales of general partnership interests failed to meet the

securities registration requirements of Section 5. See

15 U.S.C. §§ 77e(a), 77e(c); Greenwood v. FAA, 28 F.3d 971,

977 (9th Cir. 1994) (holding that courts will not “manufacture

arguments for an appellant, and a bare assertion does not

USSEC V. SCHOOLER 13

preserve a claim”). Schooler’s only defense rested on a

claimed exemption to the registration requirements under

Rule 506(b) of the Securities Act, see 17 C.F.R. § 230.506.3

However, the district court rejected this affirmative defense,

because (among other reasons) the court concluded that all of

the sales of general partnership interests were an integrated

offering and exceeded the 35 investor limit for the exemption.

17 C.F.R. § 230.506(b)(2)(i). In reaching its decisions the

district court analyzed the five factors outlined in 17 C.F.R.

§ 230.502(a):

(a) Whether the sales are part of a single plan

of financing;

(b) Whether the sales involve issuance of the

same class of securities;

(c) Whether the sales have been made at or

about the same time;

(d) Whether the same type of consideration is

being received; and

(e) Whether the sales are made for the same

general purpose.

3

Under Rule 506(b), securities are exempt from registration if they

are private offerings. 15 U.S.C. § 77d(2). A security qualifies as a private

offering if there are fewer than 35 non-accredited investors of securities

in the offering, and each non-accredited investor has “such knowledge and

experience in financial and business matters that he is capable of

evaluating the merits and risks of the prospective investment.” 17 C.F.R.

§ 230.506(b)(2).

14 USSEC V. SCHOOLER

The district court concluded that this case was analogous to

SEC v. Murphy, 626 F.2d 633 (9th Cir. 1980), where the court

found that “[t]he separation in time from one system offering

to the next suggest[ed] that the offerings were not integrated,

but that [this] factor [was] heavily outweighed by the

remaining considerations.” Id. at 646.

On appeal, Schooler fails to engage with the district

court’s analysis and to explain why the four remaining factors

do not outweigh the timing factor. Instead, he again

articulates that the offerings occurred over a long period of

time and makes additional arguments unrelated to any of the

factors. Accordingly, he has waived argument on this issue.

Greenwood, 28 F.3d at 977. The district court correctly

determined that all but the timing factor weighed in favor of

finding an integrated offering. All of the offerings were used

to finance Western’s acquisition of land for the partnerships,

each involved the issuance of general partner interests in

exchange for cash, and all were for the purpose of holding

real estate in hope of subsequent appreciation. Murphy

supports the district court’s conclusion that all sales were part

of an integrated offering even though the offerings were not

made at the same time, 626 F.2d at 646, and Schooler

identifies no authority to the contrary.

Moreover, Schooler presents no due process violation.

Schooler argues that his due process rights were violated by

the district court’s decision to amend its order after the SEC

filed an amended summary judgment motion. This argument

fails because the parties had full opportunity to brief and

argue the only issue on which the district court amended its

opinion—who bears the burden of producing sufficient facts

to establish a genuine issue for trial on exemptions. Schooler

can establish no prejudice, because he does not argue that the

USSEC V. SCHOOLER 15

district court’s resolution of this legal issue was erroneous.

Without prejudice, Schooler has not established a due process

violation. SEC v. Am. Capital Invs., Inc., 98 F.3d 1133, 1147

(9th Cir. 1996), abrogated on other grounds by Steel Co. v.

Citizens for a Better Env’t, 523 U.S. 83 (1998).

Additionally, Schooler argues that his reliance on advise

of counsel excuses his failure to comply with registration and

disclosure requirements, but this too fails. By not raising it

before the district court, Schooler waived this issue for

appeal. Campbell v. Burt, 141 F.3d 927, 931 (9th Cir.1998)

(deeming issues not raised before the district court to be

waived). Moreover, Schooler’s briefing fails to identify any

basis for excusing the waiver. We will not make arguments

for him. Greenwood, 28 F.3d at 977. On the merits, the

defense likewise fails because “Section 5 is a strict liability

statute” so “good faith reliance on counsel” cannot “preclude

liability under the statute.” SEC v. CMKM Diamonds, Inc.,

729 F.3d 1248, 1256 n.6 (9th Cir. 2013).

VI.

Lastly, we affirm the entry of summary judgment in favor

of the SEC on its claims under Section 17(a) of the Securities

Act, Section 10(b) of the Exchange Act, and Rule 10b-5

thereunder. To establish this violation, the SEC must

demonstrate that Schooler made a materially misleading

misrepresentation or omission in connection with the offer or

sale of a security in interstate commerce and with the

requisite scienter. SEC v. Phan, 500 F.3d 895, 907–08 (9th

Cir. 2007). The district court correctly concluded that the

SEC established these elements based on the undisputed

evidence that Schooler represented to investors that the value

of the “Stead property” was $2.50 per square foot. Instead,

16 USSEC V. SCHOOLER

Western had recently purchased the property for $0.40 per

square foot and the property was appraised at just under $1.00

per square foot (when the value of water rights was taken into

account). This misrepresentation was “so obviously important

to an investor, that reasonable minds cannot differ on the

question of materiality.” TSC Indus., Inc. v. Northway, Inc.,

426 U.S. 438, 450 (1976) (citation omitted).

Schooler’s only defense is good faith reliance on the

advice of counsel. Yet, the district court concluded that

Schooler had failed to meet his burden in establishing his

defense with respect to the Stead property. Specifically, the

court found no evidence to establish that Schooler “made a

complete disclosure to counsel” by informing counsel that

their advertising included representations as to the fair market

value of particular parcels. SEC v. Goldfield Deep Mines Co.

of Nev., 758 F.2d 459, 467 (9th Cir. 1985) (identifying

complete disclosure as an element of the affirmative defense

of reliance on counsel). On appeal, Schooler cites no record

evidence to rebut the district court’s finding. Schooler’s cited

pages make the conclusory assertion that disclosure was

complete, but they do not identify any evidence to support the

conclusory allegation. Accordingly, we affirm entry of

summary judgment for the SEC on the securities fraud claim.

VII.

In sum, we AFFIRM the district court’s judgment against

Louis Schooler with only two exceptions acknowledged by

the SEC. Specifically, we VACATE the civil penalty on

account of Louis Schooler’s death, and we VACATE the

disgorgement award and REMAND for reconsideration of

the appropriate disgorgement in light of Kokesh v. SEC,

137 S. Ct. 1635 (2017). In all other respects, the district

USSEC V. SCHOOLER 17

court’s judgment is AFFIRMED. The parties shall bear their

own costs on appeal.